Written in 2003, this book takes a decidedly narrow look at what the retailer Target into such a large and profitable enterprise. While Wal-Mart tends to receive considerably more attention for its relatively short rise to dominance, going from one store to a major American brand in a just a couple of decades, Target is equally, if not more deserving of a similar corporate focus.
In fact, as you read the book, you will be struck by how similar the stories of Wal-Mart and Target really are. Both were basically non-players in the national retail market in the 60s, only to become the dominant players by the 90s. Both reflect the American values of business and value. Both began with a focus cutting prices and providing customers with great service. The differences between the two, though, didn’t really begin to appear until both reached market dominance in the 90s. At that point, Wal-Mart doubled down on low prices, while Target focused on providing good value. The distinction doesn’t seem like much, but it makes all the difference.
Rowley traces the development of Target from its days as a retailer named Dayton. In the beginning, the Dayton family was looking to have the best retail store in St. Paul. They quickly succeeded and looked to expand. They began and bought other ventures, and eventually Target was born. For a while, the Target retail brand was secondary to the Dayton brand, until the Dayton family discovered that shoppers actually like Target a whole lot more. They then decided to set to work on expanding the Target brand.
The rise to dominance wasn’t easy. There was trademark scare in the 60s and hostile takeover scare in the late 80s that was only thwarted through some grassroots political activism. In spite of this, though, Target positioned itself for long-term success by focusing on a couple of things. First, Target focused on being able to distribute good brands, especially in cookware and clothing. Instead of tossing out the cheapest Chinese manufactured clothing they could find, they instead hired mid-name or up-and-coming designers to design clothing collections for them. They also contacted B-list celeb chefs to design cookware lines, and they got mildly famous houseware manufacturers (Cuisinart and such like) to design collections for them.
However, Target did not allow their brand-chasing to lead to high prices. Instead of resting on the laurels of having major brands, as many big box department stores, like Macy’s, are wont to do, Target instead focused on providing customer with the most value—good quality at affordable prices. You won’t find, say, Gucci bags at Target, but you will find similarly-designed bags with similar quality for considerably lower prices. Thus, while Target doesn’t necessarily have the lowest prices, it will most likely give you the most bang for your buck.
Another interesting thing about Target is how it revolutionized business technology. Lots of attention is focused on how Wal-Mart used technology to revolutionize the retail industry, but Rowley is quick to point out that Target made several innovations of its own, including calculating profitability by the square foot (i.e. which store sections, which shelves, and so on were most profitable within a store). The inventor of this process was later hired by Wal-Mart and he implemented it there. Target was also responsible for a good number of business process innovations, such as its return policy (anything anytime anywhere), though that was later modified. More impressively, it’s Guide for Growth is still an industry standard. Target was also astute enough to develop the department store policy of issuing customers credit, another practice that has been widely aped. What makes Target so profitable? Well, luck and timing certainly play a role. The biggest retailers of the modern age got started in the 60s, and this is perhaps not merely an accident. Still, as the old saying goes, luck favors the prepared, and the Dayton family was certainly prepared.
The values espoused by the Dayton family are most likely what gave Target its best chance to succeed. The Dayton family emphasized things like honesty, integrity, and humility. The legends of the various Cos and Presidents of the company are more truth than fiction, like the time a company president called a cosmetics employee to rehire her after her manager fired her because she went beyond company guidelines to help a customer. Target has long emphasized integrity in its customer relationship, which is why most customers are return customers. As has long been the case, Target is more than willing to treat its customers right.
Furthermore, the Dayton family—and the management they’ve fired over the years—has a long history of humility. Management is always open for criticism from anyone. Blunt, direct feedback is preferred. No one’s ego is worth denying reality for, and so anyone can and should be open to feedback and criticism. From anyone. Honesty is also emphasized as well. Rowley recounts an instance where managers were called in to discuss where they were having difficulty in implementing Guide for Growth. The first manager to speak said that he thought the rules were wonderful and that his store had 100% compliance. The second manager to speak called him a liar.
Thus, in many ways, Target’s phenomenal growth is largely due to the company embodying the Mid-Western Lutheran work ethic—hardly surprising since the company was founded by Mid-Westerners and is headquartered in Minnesota. In a corporate world that is often plagued by short-sighted greed, dishonesty, and fraud, it’s certainly refreshing to see a business succeed because it does things the right way. Target is such a company, and its success has been well-earned, and On Target is worth reading simply to see how doing the right thing, coupled with a little luck, can lead to success.
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The central thesis of Cowen’s book is that the recent economic downturn is mostly due to the law of diminishing marginal returns. The metaphor he uses to explain this is that of an orchard. In any orchard, some of the hanging fruit is closer to the ground than other fruit. The natural tendency is to first pick the low-hanging fruit, then move on to the fruit that is harder to reach. In the same way, the natural tendency in any macro economy is to make easier, more obvious innovations before making more complex (and more expensive) innovations. There is a kernel of truth to this, in that there are always diminishing marginal returns in any endeavor.
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In particular, Cowen advances the argument that it is becoming more difficult to innovate, as evidenced by the decline in the patents per researcher rate. This argument is problematic for two reasons.
First, not all inventions and innovations get patented (and some patent attempts are rejected). There has been a rather slight, though appreciable decline in the patent per researcher rate of the last several decades, but there is no research indicating whether any of this is due to the effects of various open society movements. These “open” movements are generally predicated on either the belief that ideas are free (in which case patents, copyrights, and other forms of intellectual property are null and void) or on the belief that ideas should be free (the open source movement is predicated on this). Perhaps the movement away from patenting every last innovation might explain some, most, or all of the rate decline.
Second, there is no attempt to discern whether patent law itself is the cause of declining innovation and invention. It is assumed, perhaps because this is the constitutional view, that patents encourage innovation. However, patent law has often been used to bludgeon one’s competition from copying one’s ideas and business practices. Jeff Bezos’ use of patent law to block other businesses from using one-click shopping is an example of the more extreme tendencies of patent law abuse. The continual lawsuit wars between Apple, Google, and Microsoft are another. In this case, innovations are being squelched because a) it is unprofitable to innovate if your profits simply go to your competitor and b) it is more lucrative to litigate than innovate. When litigation is more profitable than innovation, it should not be surprising that people and firms prefer litigation to innovation. Thus, it may be that the recent downturn in innovation is due not to diminishing returns but due to inept government market interference.
One bright spot in Cowen’s book is his critique of macroeconomic measuring tools. In particular, his criticism of counting government costs at face value when determining GDP is well thought-out and intelligently argued. The insight that government spending is likely subject to diminishing returns isn’t exactly brilliant, but the conclusion that perhaps government costs are inflating the real value of GDP output is quite useful. His critique of educational spending is similarly insightful, in that he notes in brief that while educational spending has roughly doubled in inflation-adjusted terms, the output, measured in terms of educational testing and economic output, has not budged much. He makes a similar case for health care as well. Ultimately, his conclusion is that our economy hasn’t really grown; it’s just that the numbers measuring it have been inflated. Unfortunately, his analysis is not yet able to indicate how much inflation currently exists in economic growth estimates, but at least he’s pointed his fellow economists down the right path.
Cowen also spends some time considering innovation in the online sphere. He notes that this is classic low-hanging fruit, to use his metaphor, but that this is not likely to lead to economic growth because of the net’s scalability.
One interesting point that he makes as evidence of the internet being low-hanging fruit is that there are a lot of amateurs driving innovation. The widespread presence of amateurs, then, is a signal that there is plenty of room for innovation.
As an aside, there is one sector in the US economy that has a significant amateur presence, and that is the automotive sector. The presence of amateurs, though, is relatively small, and confined primarily to the area of kit cars. Kit cars are a sort of DIY car manufacturing project wherein one purchases a frame and body components from a manufacturer, plus whatever accessories one wishes to buy, then goes out and purchases a separate transmission and engine, and assembles the car oneself. This is not a significant portion of the market, but there is a decent amount of innovation within this subset that is absent from the more general automotive production market. Perhaps coincidentally, kit cars do not face as much regulation as production cars. Likewise, the internet is, relative to other sectors, remarkably unregulated. One possible conclusion to be drawn, which Cowen fails to do, is that perhaps the issue is not that we lack low-hanging fruit but that the government forbids us from picking it.
From there, Cowen observes that the growth of government size and scope is largely tied to technological growth. This would suggest that government’s attempts to regulate, and thus hamper technological growth will ultimately hamper the growth of the state.
Cowen also dedicates a chapter to explaining the current economic crisis. His explanation for the crisis is that “we thought we were richer than we were.” This might seem glib at first, but it is correct. Basically, all the investments that feel through did so because they were overvalued. Banks overestimated the wealth and income of marginal lendees. Investment groups overvalued stocks, bonds, funds, CDOs, and all sorts of other financial instruments. Cowen does delve a little bit into pop psychology when explaining why we overvalued things. He relies on an argument about human beings’ tendency to follow other people and rely on signals instead of direct sources. He doesn’t spend much time discussing policies that gave the illusion of wealth, which would in turn lead to overconfidence.
The book concludes with Cowen asking what, if anything, can be done to fix the problem. His policy prescription is this: raise the status of scientists. This strikes me as an incredibly foolish policy. First, some scientists are likely to resist this. Richard Dawkins and PZ Meyers come to mind. Both have the social skills of an autistic eight-year-old, as evidenced by the fact that they routinely mock and denigrate the belief system held many people, even though the issue of the existence of God is well outside the scope of their respective scientific disciplines. Basically, these scientists (and several others as well) are complete assholes that few people will ever come to like or respect.
That aside, there is a second concern. Namely, that scientists in general are not trustworthy. The relatively recent scandal at East Anglia suggests that there are some scientist who are more committed to ideology than scientific truth. They can be trusted or respected, and it is unwise to give any form of power to these sort of charlatans. (Of course, giving power to charlatans is the foundation of democracy anyway, amirite?) Worse still, even when scientists are being sincere and honest in their research, most of it cannot be replicated and therefore cannot be trusted. Does it make sense to give status to those who can’t be trusted even when they are sincere?
Furthermore, it was scientists that produced the atomic bomb. Scientists were behind the technocratic drive of Nazi Germany. Scientists supported the efforts of central planning in the USSR. This is not to say that all scientists are evil. It only to point out that scientists are human, just like everyone else and, as such, are prone to the same problems and imperfections of the rest of us.
Finally, it should be noted that pure science does not lead to as many contributions and innovations as engineering. Perhaps Cowen conflates scientists and engineers (and that is certainly his right, though it would be helpful to clarify that). Even so, the better solution would be to give higher status to engineers and other “hands-on” producers and workers that generate the bulk of day-to-day innovations.
In all, this book is generally a mixed bag of obvious truths, shortsighted analysis, and mildly brilliant insights which makes for an interesting, if uneven read. It’s short and fun and thought-provoking, and seems at times that it’s designed to pick fights.
Tabarrok focuses on four policy areas in which changes could yield very positive results. He kicks off the short eBook by focusing first on patent reform, noting that many areas of patent coverage (software, technical processes e.g.) have low innovation costs and, as such, are not worthy of patent protection. In fact, his recommended patent reform is basically total abolition of all patents, save for medicine and a handful of other fields. This seems rather viable given that most inventions and innovations are generally cheap and likely inevitable. He also has a few short steps that would help as well, like requiring a functioning prototype and capping terms to seven or fourteen years depending on category.
He next turns his sights on to a prize system for innovation. His proposed policies are well-intentioned but naïve. He proposes that the government fund sizeable prizes (to the tune of millions or billions of dollars per prize) with specific goals—not methods—in mind. This should work in theory, but the fundamental problem with this method is that it fails to discern how the government would go about setting the most economic goals and prizes. This process could become highly politicized, as anything involving billions of federal dollars tends to. However, venture capitalists and innovation firms should take note of this recommendation and implement it.
Tabarrok closes his short book by looking briefly at education—both public and post-secondary. Regarding the former, he recommends reform. Why this is preferable to privatization is unstated, but perhaps that is beyond the scope of the book. One curious thing about is argument is how he claims that there is a correlation between high school graduation rates and GDP growth. While statistical analysis bears this out, it is worth noting that there is no proven causal relationship between the two. It could be that GDP growth causes increases in the rate of High School graduation as families become wealthier, and better able to secure leisure time for their children, thus reducing teenagers’ need to work.
It is worth pointing out, though, that public education in the US is crap, and is entirely too test-driven, thanks in large part to No Child Left Behind.
Tabarrok doesn’t dwell much on this, which seems to be a bit of an oversight.Finally, Tabarrok turns his sights on to college education, noting that there is undoubtedly a college bubble and that there should thus be fewer college students.
Government reform is recommended, since that is a source of the current malinvestment.
Better education as to the benefits of a post-secondary education is also recommended, though this seems largely fruitless.
In all, this short book is a rather thought-provoking read. Readers are not likely to agree with all the answers, but the questions are worth mulling over. In fact, the questions the book asks make it worth the purchase. There is a lot to consider and debate, thanks to this book, and the answers Tabarrok provides are considerably less hackneyed than what has been heretofore seen. As such, the book is a recommended read.
Robert Neuwirth is bringing new insights to familiar (for him, unfamiliar for most of us) territory in his book, “Stealth of Nations“. His previous work, “Shadow Cities” was a plea to take squatter cities and informal settlements seriously, rather than dismissing them as slums. (My review of Shadow Cities is here.) His mission in this new book is for us to reconsider the “informal economy”, which he rebrands “System D”.
“System D” is an abbreviation for “l’economie de la débrouillardise”, a tern coined in French-speaking Africa to refer to a system of “resourceful and ingenious” people who make their livings outside the formal, taxed and regulated economy. Neuwirth rejects the term “informal” because the coiner of that phrase, British anthropologist Keith Hart, included the criminal underground in his term, “the informal economy”. Neuwirth wants to celebrate the energy and ingenuity of people who make their living outside formal economic structure, but distinguish those he celebrates from those who are selling drugs or running prostitution rings. The heroes of System D may avoid taxes, smuggle goods or operate without permits, but Neuwirth sees them not as criminals but as hardworking people trying to make a living in systems that are broken and corrupt.
Neuwirth’s great strength is as a traveler and storyteller. Like “Shadow Cities”, “Stealth of Nation” is packed chock full with stories from the communities he’s visited in Brazil, Paraguay, Nigeria, China and the United States. We meet street merchants selling pens and cakes in São Paolo, a handbag manufacturer in Guangzhou and the baker of high-end (if unlicensed) olive oil cake in New York City. He takes a particularly deep dive in Lagos, a megalopolis he describes as “a System D city”, where virtually no infrastructures are provided by the state, and where basic services like power, drinking water and public transit are provided by private industry and workers’ collectives, who build systems that function with limited licensing, taxation or oversight.
This wealth of narratives helps make the case that System D is massive and pervasive. Working from numbers from the World Bank and using the insights of Austrian economist Friedrich Schneider, Neuwirth offers an estimate that System D is responsible for roughly $10 trillion in goods and services bought and sold annually. That makes “Bazaristan” the second largest economy in the world, behind the United States. He further argues that System D provides employment for a majority of adults in many developing nations. Whether or not we approve of the activities of System D, Neuwirth argues, we need to take it seriously because of the large number of individuals it impacts.
Neuwirth’s inquiry is extremely broad in scope, both in terms of the subjects he considers and the timescale he examines. Chapters look at phenomena like piracy and counterfeit goods, and smuggling across international borders, which Neuwirth examines primarily via Paraguay’s Ciudad del Este, a urban center that exists primarily so Brazilian citizens – and merchants – can avoid paying taxes. To provide a historical context for these sorts of trade, Neuwirth calls on classical economists, including Adam Smith, as well as histories from the 18th century to demonstrate the ongoing demonization and dismissal of System D merchants. For me, these excursions into the past are less enjoyable that the wealth of contemporary examples he provides, though they’re helpful in establishing that System D is a very old system as well as a new one.
The danger in both of Neuwirth’s books is that he loves his subject so much, he occasionally celebrates it uncritically. “Shadow Cities” occasionally read to me as a marketing brochure for Brazilian favelas, suggesting we abandon traditional urban planning and invite urban entrepreneurs to rewire the electrical grid to meet their needs. “Stealth of Nations” is more careful, and Neuwirth engages with the ways in which Lagos can be a nightmare for the people who live there, not just a creative laboratory for urban innovation. At the same time, he urges us to take seriously the miracle that Lagos works at all, a miracle that can be hard to see underneath the diesel smog, caught in an hours-long go-slow.
This appreciation for the complex systems that compose System D can push Neuwirth towards a sort of conservatism that’s familiar to readers of Jane Jacobs. Neuwirth’s Robert Moses is Lagos State governor Babatunde Fashola, who Neuwirth lambasts for clearing street merchants from busy intersections and setting up formalized markets in inconveniently located parts of the city. Neuwirth is right to point out that Fashola, and other urban planners, have a tendency to undervalue the contributions of street merchants, and tend to propose unworkable alternatives to current systems. But celebrating contemporary Lagos in the ways that Jacobs celebrated the Lower East Side seems to miss two critical points. First, to the extent that Lagos works right now, it just barely works – Neuwirth acknowledges as much when he points out that some of Lagos’s most impenetrable traffic jams are caused by the tendency of merchants to turn roadways into markets. Second, Lagos is growing at a ferocious pace, and Fashola seems to be taking seriously the challenge of allowing the city to continue functioning as a megalopolis, likely to soon be one of the world’s largest cities. One possible response to Neuwirth’s criticism is to point out that Fashola was just re-elected with 81% of the vote in a poll most observers saw as free and fair.
Neuwirth is a journalist and documentarian, not an economist or an urban planner, and it may be unreasonable to ask him to solve the thorny problem of bringing System D and the formal economy into closer partnership. Neuwirth examines Hernando de Soto’s work on formalizing System D through property rights. De Soto’s most helpful intervention is the observation that the poor have wealth – homes, businesses, assets – but few ways to access them. By creating a paper trail, establishing ownership over houses and other real estate, de Soto argues that the poor can access their wealth, borrowing against their homes and using the loans to start new businesses. Neuwirth looks at de Soto’s native Peru and concludes that formalization hasn’t done much to help System D. The problem is the banks, who are perfectly willing to accept deposits from System D entrepreneurs, but unwilling to lend to them. Neuwirth’s anger is rightly placed, and his solution – that communities and governments need to demand that banks serve the communities they are located in, not just their shareholders – is timely and correct, even if difficult to implement.
The solutions Neuwirth offers for strengthening and legitimating System D are, by his own admission, modest in scope. Merchants should work together to regulate their activities, settling disputes within mediation mechanisms. They should take responsibility for the physical spaces they inhabit and work to make them clean and safe. They should consider systems that review product safety and ensure the quality of goods sold. Neuwirth isn’t opposed to regulatory involvement in this space – he looks closely at the “pure water” industry in Nigeria, where entrepreneurs drill wells, pump water and purify it under government standards before selling it in single-use sachets to thirsty customers. The system could be a health nightmare if minimum health standards are not enforced. The Lagos government can’t provide clean drinking water to its citizens, so it has found a way to work with System D to ensure that people have water and the water doesn’t kill them – for System D advocates, there’s potential in that story and a model other governments might follow.
But the pure water story also reveals the apparent limits of System D. “Pure water” usually won’t kill you, but it’s an environmental nightmare, as millions of nylon bags clog the Lagos sewers. It’s a wonderful thing that Lagosians can drink safe water, but a system where thousands of school-age girls sell sachets of water because you can’t drink the water out of the pipes isn’t a system any sane planner would advocate for. System D can get Lagos’s citizens to work, but it’s never going to build affordable and environmentally sound public transportation. If merchants follow Neuwirth’s advice, they may collectively buy bigger diesel generators, but they’re unlikely to fix Nigeria’s laughably inadequate power grid.
The people Neuwirth celebrates are – rightly – frustrated by their governments. They avoid paying taxes both because those taxes can be arbitrary and unaffordable, and because they see very few government services in exchange bought with those revenues. But governments need revenues to build infrastructures. And, as economist Paul Collier argues, they need taxes – and need to put those taxes to use in productive ways – in order to have legitimacy. System D seems like a local maximum in an equation – when it works well, it’s amazing what entrepreneurial people can accomplish against impossible odds. But the solutions created are convoluted and incomplete, and it’s reasonable to worry that System D may prevent more formal systems from providing more complete solutions to societal problems.
I don’t actually disagree with Neuwirth on this point – I wrote an essay some years back about incremental infrastructure, an idea I’d had from studying African mobile phone markets, that suggested that systems like power grids and roadways might be built by the cooperation of entrepreneurs when governments failed. My proposal suffers from the same weaknesses I’m criticizing Neuwirth for: it’s hard to see how a collective of merchants builds a railroad, and sometimes a railroad is what’s really needed for economic development.
But that’s an awfully big problem to demand that Neuwirth tackle – if you want to understand precisely how complicated that problem is, try this thought piece from Collier, proposing a possible solution to railroad construction in sub-Saharan Africa. Neuwirth’s job isn’t to solve the problems of System D. What he does – compellingly, readably, engagingly, and frequently, brilliantly – is give the reader a picture of how the world’s economies actually work, and a convincing argument that we need to respect and understand these economic systems. It’s a good read and an important book.
When you pick up Neuwirth’s new book, also consider grabbing a copy of Gordon Mathews’s
“Ghetto at the Center of the World”
, a remarkable ethnography of a single building in Hong Kong, Chungking Mansions. Chungking Mansions is a nondescript and somewhat run-down tower block in one of the more crowded corners of Kowloon. Inside is a remarkable market, where Chinese, Pakistani and sub-Saharan African merchants interact with one another in a microcosm of global trade. Mathews refers to this economic phenomenon as “low-end globalization”, and his book unpacks the history, mechanics, personalities and motivations in a way that is absolutely fascinating.
Chungking Mansions exists because of a peculiarity of Hong Kong’s visa policies. Tourist visas to Hong Kong are easily obtained by citizens of many nations – residents of countries like Ghana, Nigeria and Kenya often have difficulty obtaining visas to Europe, the US or China, but are able to travel to Hong Kong for anywhere between 7 and 90 days, depending on the discretion of the immigration officer. As China became a major manufacturing power, Chungking Mansions became a critical interface between Chinese factories and developing world markets. The upper floors of the building feature low-cost guesthouses that cater primarily to traveling merchants, and restaurants that offer home cooking for the African and South Asian migrants who work out of the building.
On the ground floor, dozens of stalls feature Pakistani merchants selling Chinese-made mobile phones to African middlemen. Mathews documents the trade in intimate detail, explaining the ownership of the individual stalls (they are generally rented from Chinese owners who are rarely present in the building, but have a powerful owner’s association that governs the working on the market), the provenance of the phones sold (including the difference between original phones, 14-day phones – original phones returned to the vendor by dissatisfied customers, good fakes and bad fakes) and the economics of importing phones into sub-Saharan Africa. Mathews posits (without much data to back this claim) that up to half the mobile phones in Africa come through Chungking Market and enter African markets through the luggage of entrepreneurs.
I found Mathews’s account so compelling that Chungking Mansions was my first stop when visiting Hong Kong a few weeks ago. Based on his explanation of Chinese perceptions of the building (as a dangerous place filled with drug addicts and criminals), I expected a much shadier place than I actually found. Chungking Mansions is immediately familiar to anyone who’s bought electronics in the developing world – it’s cleaner and better organized than markets I’ve been to in Nairobi and New Delhi, but in some ways, functionally the same place. Walking through the stalls, I experienced a tesseract, a folding of space that let me move between Hong Kong, Pakistan and West Africa over the course of a few meters. I dropped into one of the few non-phone stores, a clothing store featuring street fashions, including a wide array of Yankee caps. I gave the merchant grief about not stocking Red Sox hats, quickly figured out that he was Ghanaian, greeted him in Twi, and was warmly embraced and invited upstairs for fufu and groundnut soup. It wasn’t at all hard to figure out why Mathews had fallen in love with the place – if you’re interested in how globalization is transforming economies, Chungking Mansions really is one of the centers of the world.
I had the chance to meet Mathews when we lectured together at the University of Hong Kong a few days later. He’s as wonderfully crazy as you’d imagine him to be, and told me that he’d written the book in a bar across the street from his research site. “The key is that the bar has roasted peanuts in the shell. I’d shell a peanut and think, then write a sentence, then sip my beer. That writing pace is just perfect as long as you remain under three beers.” Rarely have I learned so much from a single ethnographer – how to smuggle phones into Ghana in my luggage, the best strategies for overstaying my Hong Kong tourist visa, how to befriend Nepali heroin addicts, and how to pace my writing.
I’ve been pushing Mathews’s book on the ethnographers I know because it’s an amazing example of the power of the deep dive. It’s possible that no one on the planet understands Chungking Mansions as thoroughly as Mathews does based on his decade of research. But his insights are profoundly helpful not just for understanding this one wonderful and strange building, but for understanding globalization as it is actually practiced. Where Neuwirth takes a broad view, considering economies on four different continents, Mathews rarely leaves the confines of a single building and still manages to tell a story that’s global in scope and impact.
I recently read Daniel Yergin’s fascinating book The Quest
. It’s a panoramic view of the global energy industry. For me personally, many parts were familiar territory. But many parts were new to me, and the overall integration of the story was valuable. I encourage every non-specialist (like me) who is curious about energy to read the book.
But I was left thirsty for two more books.
The first book would be a more technical treatment of the same material.
I repeatedly found myself wanting more technical detail. The pollution from cars has come down by 99% between 1970 and 2010. How was this done!? New nuclear reactor designs are fundamentally safer than the reactors that got into trouble at Chernobyl or Fukushima. What are these designs and why are they fundamentally safer!? Hybrid cars give you much higher mileage than ordinary cars. What are the key innovations which make this possible and how much did each of these new ideas contribute? The oil industry is doing incredible things digging deep into the sea. What are these engineering challenges and how are they being overcome?
And so on. The Quest is a good book but the The Quest for Geeks which would be a great book.
The second direction in which I was curious and unsatisfied was India. The book has roughly nothing about India. It talks a bit about about Suzlon and has some political stories about India’s views in global climate negotiations. For the rest, there is nothing about India’s energy industry. It would be great if a comparable panoramic treatment was done, focusing on India. Perhaps Girish Sant and/or Rangan Banerjee should embark on such a project.
Like A Financial Analysis of al-Qaeda in Iraq, this book is rather technical and highly academic in approach. Unsurprisingly, it is a rather boring read for the most part. Furthermore, the book isn’t particularly insightful.
There were some who apparently claimed, presumably around the time this book was written, that capitalism was responsible for causing and perpetuating apartheid and racial division. Williams seeks to correct this misconception, and does so quite adequately by pointing out how it was government legislation that created, enabled, and perpetuated apartheid and the corresponding racism.Williams’ arguments are not unique or original, in a sense, because racial biases can, and have been, easily corrected on the free market by the “inferior” race offering lower prices for their labor. The reason this didn’t happen in South Africa was because the government forbade competition, or elsewise severely hindered it.
Williams’ book, then, is useful primarily as an academic resource. It is not easy or enjoyable to read, part of which is due to the structure of the book. For me, it only reinforced my beliefs in the general equitability of the market. I imagine that the same will be true for those who are inclined to read this. My recommendation is to only read this book if you are doing research on South Africa or apartheid.
Maybe my discipline for reading has been waning in recent weeks, because this is the second consecutive book that I’ve been unable to read in its entirety before quitting. The problem with The Winner’s Curse is that it is a highly technical way of saying “duh.” By this I mean that Thaler addresses issues that are only problems for economists that apparently have no experience with actual human beings.
Economists have long assumed that humans are, fundamentally, rational creatures. Even von Mises assumed as such, although it should be noted that his usage of “rational” was tautological, and based solely on economic actor’s behavior (instead of, say, the economic actor’s stated goal) and bound by the limits of human knowledge. Basically, Mises argued that one’s “true” desires were shown by one’s behavior, and that all humans pursued the most efficient course of action to attain the desired ends.
However, mainstream economists generally tend to define “rationality” as one’s tendency to act in one’s best long-term interest. Whether this definition accounts for the constraints of humanity (i.e. imperfect knowledge, the constraint of time, etc.) varies by economist. At any rate, the assumption is that humans have a tendency and desire to act in their long-term best interest, and, furthermore, derive only (or mostly) direct utility from consumption.
These assumptions are wholly fallacious, and contradict observable reality, which creates quite a problem for economists who try to make detailed policy prescriptions, since doing so generally requires the ability to correctly predict micro-level behavior. Obviously, economists have largely been unable to do so, in part because they bought into the myth of the average person, and in part because the average person does not resemble an actual human as much as it resembles a watered-down version of what economists think an ideal human being would look like.
Thus, much of what has been written about theoretical human behavior from an economist’s standpoint has been largely irrelevant and useless to those who live in reality because economists desire a reality that does not exist. One example of this is what’s known as the Ultimatum Game. The game is played by taking two people, giving one of them a sum of money, and telling him to split it however he chooses with the other player. If the other player accepts, they split the money accordingly and go on their merry way. If, however, the other player declines the offer, neither player gets anything and they go on their unmerry way. Theory dictates that the most rational course of action is for Player A to offer Player B one penny and for Player B to accept, with the idea being that one penny is better than nothing.
But when put into practice, as Thaler details quite extensively in his book, the offer is rarely a penny. It is usually substantially more than that (close to 50% in many cases).
It turns out that humans are more complex than economists would lead you to believe. Many humans, it appears, have more than a direct pecuniary interest in monetary offers. This shouldn’t be surprising, since humans are social creatures with a rather common need to show off. Non-economists tend to recognize this, and therefore make a point of making an offer that is not perceived as insulting. If an offer were too low, the recipient would decline it because the recipient would perceive the value of the money to be lower than the value of the social communication that declining the offer would bring (i.e. the recipient would find it more useful to say he’s insulted than to accept the money). This is, without a doubt, an economic judgment. Yet it is one that economists seem incapable of accounting for because it makes no sense to them.
But, without becoming too dryly analytical, humans are not hardwired to think solely in terms of direct utility. Products can serve multiple functions; some direct, some indirect. Polo shirts, for example, have a direct function of keeping one’s upper body shielded from the elements. But certain polo shirts, such as those made by, say, Ralph Lauren, have an indirect function as a status symbol. And there are people in this world, apparently, who find the added, indirect value to be worth the cost. Economists have failed to account for this sort of thinking, and have thus neglected to consider the full range of value that decisions can provide, which is why there is such a divergence between reality and theory when it comes to things like Ultimatum Game.
The rest of the book, or at least the parts I read, seemed to bear this sort of thing out as well. Why is there such a difference between reality and theory in economics? The answer is, for the most part, quite simple: Economic theory doesn’t actually account for the behavior of real people.
Thaler, in making this decidedly simple point, feels compelled to dress it up in fancy mathematics. There is, of course, nothing inherently wrong with doing this, but it does make for a very dry read. Also, it seems to be a very complicated way of stating the obvious.
However, this degree of precision and insight makes the Winner’s Curse a necessary read for any aspiring economist. Economics, as a method of study, is not particularly useful if one neither knows nor corrects for the fundamental mistaken assumptions upon which the intellectual edifice is built. Economics does have plenty to offer, as a method of analysis, but it is only useful if its axioms are realistic. The Winner’s Curse, then, is useful because it questions the basics of theory. Not only that, it provides the answers as well.
I give up.
I have tried reading Krugman for several years but I just can’t do it. I picked up Return of Depression Economics when I was a junior in high school, but I couldn’t finish it. I use to subscribe to his blog, but I simply found him impossible to read on a daily basis. I couldn’t even finish Pop Internationalism.
The biggest problem I have with Krugman is that he gets too caught up in his own perceived brilliance, and he has a tendency to become quite smug and condescending. This usually becomes a problem because he isn’t often right, so reading him just makes me want to find him and then punch him dead in the face. Arrogance is only amusing when you’re right.
Anyhow, Pop Internationalism isn’t all bad; Krugman manages to make a couple of good points. They’re mostly contained in the first four chapters, so if you do eventually feel like reading this book, you needn’t bother reading beyond chapter five.
In the first place, Krugman is correct in noting that countries are not corporations, nor are they comparable to corporations, at least in terms of competitiveness. The idea that the United States “competes” with Japan (or Germany or Britain or etc.) is a rather strange notion, and a fallacious one to boot. Trade is not necessarily win-lose, which, come to think of it, sounds quite strange coming from Krugman. As such, trading with Japan isn’t an inherently destructive behavior. However, it is possible that trade can have negative consequences. It should simply be noted that trade is neither inherently good nor inherently bad. It can be either.
In the second place, Krugman correctly notes that, accepting the concept of competitiveness for sake of argument, a nation’s ability to compete in the global market is more closely tied to domestic production policy instead of foreign trade policy. Stated more clearly, taxes and regulations play a larger role in international competitiveness than do tariffs and trade agreements. As such, the proper policy prescription for encouraging competitiveness in the global marketplace is deregulation and corporate tax cuts.
Overall, Pop Internationalism starts with a bit of a bang, then dissolves into self-congratulatory mental masturbation. The first couple of chapters are thoughtful and thought-provoking, but everything after that is nauseatingly narcissistic. Read at your own peril.
Suppose a young person is going to start a Ph.D. in economics. What essential readings would you recommend prior to this?
In my opinion, the Ph.D. in economics involves a heavy emphasis on tools. But the story isn’t told, about why we are building these tools. The intuition isn’t built, about the world out there that we seek to model. I always joke that economics students who are clueless about reality are like a child studying projectile motion without having ever thrown something into the air.
So I thought it’s useful to pick a set of books that touch on the great themes of the world, often going into troublesome terrain that the models aren’t very good at, so as to lay a foundation of background knowledge and historical knowledge which can pave the way to usefully assimilating what’s taught in the economics Ph.D.
Here’s my compact checklist of books worth reading. Please do suggest books, and disagree with this list, in the comments to this post.
- Good capitalism, bad capitalism, and the economics of growth and prosperity by William J. Baumol, Robert E. Litan and Carl J. Schramm.
- A splendid exchange: How trade shaped the world by William J. Bernstein.
- The elusive quest for growth by William Russell Easterly.
- Invisible engines: How software platforms drive innovation and transform industries by David S. Evans, Andrei Hagiu and Richard Schmalensee.
- Capitalism and freedom by Milton Friedman.
- The great crash of 1929 by John Kenneth Galbraith.
- The age of uncertainty by John Kenneth Galbraith.
- Exit, voice, loyalty by Albert O. Hirschman
- More money than God: Hedge funds and the making of a new elite by Sebastian Mallaby.
- Reinventing the bazaar: A natural history of markets by John McMillan.
- Readings in applied microeconomics: The power of the market edited by Craig Newmark.
- From the corn laws to free trade: Interests, ideas and institutions in historical perspective by Cheryl Schonhardt-Bailey.
- Seeing like a State by James C. Scott.
- The company of strangers by Paul Seabright.
- Information rules: A strategic guide to the network economy by Carl Shapiro and Hal R. Varian.
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I won’t hold it against my readers if they find that macroeconomics is complicated and that the course and solution of the financial crisis (let alone the road ahead) seem to constitute a very complex system of processes. Indeed, if this is the case it is obviously because it is and this is precisely why it we are still, by and large, stuck in the mire.
Still, help is readily available and the recent book entitled “Endgame: The End of the Debt SuperCycle and How It Changes Everything” by John Mauldin and Jonathan Tepper is a fine example of how to make a complicated topic easy to understand without compromising on detail.
The Endgame essentially reads as a blueprint of the global economy and her financial system. It provides a detailed and rich analysis on the financial crisis, what led up to it and what is likely to follow. In its core, it is built on the simple premise that taking on debt today will impact on your ability to maneuvre financially tomorrow. However, once you transfer this idea to the level of sovereign states and their interaction through an immensely complicated set of feedback loops and interconnected processes most analysts and economists fall short of an adequate explanation.
Enter Jonathan Tepper and John Mauldin.
With a concise style of writing and a sharp sight for taking the argument straight to the core, the authors lay bare the global financial system and its reckless production of excess debt. The book provides a clear and crisp analysis of what must be done and what is likely to happen if adequate action is not taken.
I would highlight in particular the chapters on individual countries which excellently convey the idea that all economies now face choices which range from difficult to disasterous. Here, it is easy to file the book under the heading of eternal pain and damnation. But it never transcends into a spiral of doom and gloom which means that it emerges as an extremely well balanced account of the current state of the global economy and the challenges that lie ahead.
Personally, I have long held that the main unspoken and untold macroeconomic consequence as a result of the crisis is how the next decade invariably will see a number of more or less spectacular and costly sovereign defaults in the OECD. What matters is how we deal with these and which choices the individual countries make. If the right choices are made, we will have less defaults rather than many but I don’t think we can avoid them altogether.
Within this framework, the Endgame provides an indispensable guide to the macroeconomic landscape going forward.
Full Disclosure: I know and work together with Jonathan Tepper but I have no financial interest in the book whatsoever so I can safely recommend it as a strong, nay necessary buy on Amazon.
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